Ahead Of Major October Redemptions, Spanish Treasury Cash Slides To Two Year Low

A month ago, when we first presented the dwindling Spanish treasury cash position, we wrote: "once the next Spanish State Liability update is posted, we wouldn't be surprised to see this number plunge to a new post-Lehman low. Yet what is scariest is that all else equal (and it never is), at the current run rate Spain may well run out of cash by the end of the year even assuming it manages to conclude all its remaining auctions through year's end without a glitch." The August cash balance update was just released by the Banco de Espana, and there's good news, unsurprising news and bad news.

The good news: the new number, which came at €19 billion (compared to July's €23.2 billion) is not a now post-Lehman low. Yet. That number is still the €16.3 billion from August 2009.

The unsurprising news is that the August cash balance is the lowest it has been since August 2010, a time when Spanish banks were not openly insolvent, and when Spain did not openly need a bailout.

The bad news, is that as we expected last month, the burn rate, of over €4 billion per month, is one which still would mean that absent a major cash injection, Spain will run out of money by the end of the year.

Actually, there is even worse news: while in September, which is now over, there were no material cash needs that we know of (aside from the endless budget deficit), October is a very different story.

As we wrote in "The Chart Spain's Mariano Rajoy Wishes Could Be Swept Under The Rug", Spain has a major net cash outflow in the month that has just started, an outflow which unless some magical source of cash is promptly procured, then Rajoy will need a real bailout, as opposed to the faux ECB-mandated one, which buys the country some time to fund itself for a few more weeks, before that can kicking exercise too fades.

Here is what else we wrote:

As is quite obvious on the chart above, and explains Goldman's urgency with a formal Spanish ECB activation request, the closer we get to October, the closer Spain gets to running out of cash. And in that particular case none of the currently implemented reality countermeasures will do anything to hide the fact that Europe's emperor was naked from the very beginning.

The flowchart then becomes as follows:

1. Find out what the Spanish cash balance was as of August. If the economy indeed contracted far more than expected, which it likely did, this number should dip below €20 billion for the first time since August 2011.

2. The September number will not be known until a month later. However, it is safe to assume that it will not be a blockbuster cash surge.

3. If the total cash balance extrapolated going into October is close to the ~€15 billion needed to satisfy the Net Cash Requirement, watch out below, as "Plan Silvio" comes into play.

3.5. What is "Plan Silvio" you may ask? Simple - in November 2011, the ECB made it very clear it would no longer purchase Italian bonds as long as Berlusconi was in charge. In essence, this was the first act of the now totally political ECB, courtesy of its then-brand new president Mario Draghi, who had replaced JC Trichet days earlier. End result: Italian bonds soared to their post-Eurozone highs, and Silvio was promptly replaced with a Goldman technocrat. Just as was planned from the beginning.

4. Of course, Plan Silvio will be called Plan Mariano in its 2012 version. It will, however, manifest itself in identical terms to its prior iteration: a bond curve inversion which forces the current administration to do the biddings of the market. Should the Spanish bond curve, however, invert, it would mean that the 2 years will literally implode, as the matched yield will soar by 300-400 bps.

5. Next steps: in 2011, one firm that literally bet the farm that the ECB would not allow a curve inversion in Italy (it did), as a catalyst to replacing the current government, was everyone's favorite client money vaporized: MF Global. Should Plan Mariano be a "go", we can only wonder how many other hedge funds and prime brokers will suffer the MF Global fate, now that buying the Spanish short end is the "no brainer" trade of 2012.

Naturally, all of the above assumes that the Spanish economic contraction has continued, and its funding needs are over and above those budgeted at the beginning of the year when the Treasury bond issuance schedule was announced.

Ironically, now that Silvio Berlucosni is being groomed by Mario Monti to reenter Italian politics, this time properly educated in the unconditional requirements of the global banking syndicate (never tell the truth; always do as your Goldman superiors tell you to; sit; smile; don't assume for a moment you are in charge and just play with the underage girls), it is Spain's Mariano Rajoy that is increasingly becoming a globalist headache, something which every other technocrat in Europe, and its banks, is becoming aware of.

Unless Rajoy changes his ways and very quickly, and by this we mean the next 47-72 hours, and demands a bailout, except the ECB to pull "Plan Silvio" on Monti, and quickly and quietly replace him with yet another Goldman field agent, currently getting his debriefing and ready to act unless Rajoy finally does as he is told...

The Spanish pretender taking up the same strategy of run the field in an empty stadium. ECB has done it in Italy and in Greece. France is next, or Maybe Holland....they've been hiding a shit sandwich in the fridge for a while.

But this won't happen. Even Greece is still in the Eurozone. Do you think Merkel and Hollande have the guts to pull the plug on Greece in November? I don't think so. The political costs would be too high. Merkel has an election next year. The aftermath of Grexit would too uncertain. Merkel can't risk that.

Of course, ignore the fact that Spain using ELA makes it Greece, not Uganda, front and center (which it publicly already did several weeks ago).

Most certainly, ignore the fact that ELA has absolutely nothing to do with treasury cash and everything to do with bank cash funding by the ECB, which, by the way, was at a record €412 billion last month, so no, the ELA would do absolutely nothing to replenish sovereign cash balances, something explicitly prohibited by article 123.

Forget about those treaties. How many articles have been breached since the creation of the Euro? The ECB OMT is "not printing money" because it's sterilised. But the term deposits or debt certificates used to sterilise OMT are eligible for MRO/LTRO. And how about the No Bailout Clause? Did it prevent the creation of EFSF/ESM?

Of course, Europe can and will use any form of roundabout funding to fund the sovereign, which means using the ECB as the ultimate source of funding and one which bypasses the need for an outflow from the local treasury, and which is what Europe has been doing, but when push comes to shove and when Spain indicates zero cash balance, the ECB's hands are tied as at that moment it becomes very clear that Article 123 is being explicitly breached. In other words, while ECB/ELA cash can be used in lieu of Treasury cash, it can absolutely never be used as a source that funds said Treasury. The ESM can buy debt in the primary market, because it is a quasi-fiscal policy instrument, at least superficially, and not one controlled by the monetary policy setting ECB. Secondary bond buys by the ECB do not provide net cash to a given issuing treasury - they merely impact prices.

Finally, when someone says "country X in Europe is printing cash" it does not mean that it is printing drachmas or pesetas. It means it is funding its banks via its own national bank, by onboarding risk that otherwise would be at the ECB, with the ECB's implicit agreement.

"But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government."

This is from testosteronepit's post on how Greece managed to pay maturing debt in August.

P.S. You have too much faith in those corrupt Eurocrats. Whether it is Article 123 or 123456, it means nothing.

In case you are still confused, here is what ELA really means, from the prior post:

Greek banks have run out of ECB eligible collateral already and can only access Bank of Greece’s ELA, but even with ELA, the collateral, typically loans, is not unlimited. They have already borrowed €60bn via ELA which, assuming 50% haircut corresponds to around €120bn of loan collateral. Outstanding loans are €250bn, so Greek banks have a maximum of €130bn of remaining loan collateral which allows for a maximum of €65bn of additional borrowing from Bank of Greece’s ELA. This corresponds to around 40% of Greek bank deposits which stood at €170bn as of the end of March. The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA. The alternative is for Greek banks to be allowed to issue more government guaranteed paper but the ECB can, with a 2/3rd majority, block a steep and unsustainable increase in Bank of Greece’s ELA. This would effectively cut Bank of Greece off from TARGET2.

Yes, the supply of loans may be limited but the supply of sovereign debt is unlimited. Peter Tchir mentioned the similar but slightly different creation of "eligible collateral" out of thin air back in Jan.

What the TPTB are affraid of the most, is the people loosing the trust in the system. That is why they will bail out Spain and anybody else that needs bailing out. Once people loose trust in the system all the bets are off. Hyperinflation will take over. After that that you will have hard currency such as gold and silver for store of value and soft currency such as their inflated fiat money for paying everyday bills. Welcome to great depression 2.0

All over the world banks have been borrowing cheap cb money and buying gubbermint bonds and raking in bonuses, all while demanding everyone else gets austerity. Fuck the squid, fuck bankia, fuck them all. Die friggin parasite bitchez.

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